Tuesday, August 17, 2010

India and China

One of the tantalising questions in economic debate is who will win the economic race in the coming years: India or China? Until recently, there was not much to debate. Everybody knew it would be China. But, in the last year or so, one notices a shift. India has a better demographic profile. China's currency is set to appreciate which will drag down export growth, so the contention goes. India will move into double digits. China will drop into a single digit.

Arvind Subramaniam wades into this debate and he favours China. He sees corruption, insurgency and poor governance in general as going against India.

Long-run growth depends on the quality of supporting public institutions. True, the India of today is less of a regulatory nightmare than before the opening-up in 1991. Some institutions – those that hold elections, preserve financial stability and regulate telecommunications, for example – have worked well. But these exceptions apart, the state is weak and fraying. Policy reforms do not deserve the spectacular acceleration in growth that the economy has delivered.

Well, then you have to explain why economic growth has improved in recent years. There is more corruption. Is there more insurgency? We may hear more about the Naxalite problem but that does not mean there we have no faced insurgency earlier- we have had enormous problems in the North- East, some of which continues. Is governance worse? There are some areas- such as tax services- where one sees an improvement. Telecom has seen a revolution. The RTI is a big change. I am not sure governance is worse than it was ten years ago.

The explanations for improved growth that Subramaniam provides- more entrepreneurship, bigger role for the private sector, competition among states- are not the whole story. The solid underpinning comes from higher savings and investment. If these continue to rise, why should governance problems hold up growth?

Incidentally, Morgan Stanley is willing to bet on India, a rather surprising forecast coming from a firm that was quite bearish about India's growth prospects some time ago.


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